ATO overhauls legal services

The Australian Taxation Office is overhauling its legal services practice in a bid to resolve disputes before they escalate into court action.

But experts have called on the revenue authority to go one step further and create a new appeals area to arrest a trend of major court losses.

The ATO revealed its new strategy yesterday as it defended its litigation record, highlighting that just 767 of the 16.5 million returns lodged last ­fiscal year led to litigious appeals.

“As a percentage of the system, it probably shows a fairly healthy state," ATO second commissioner Jennie Granger said at the Australasian Tax Teachers Association conference at the University of Sydney.

While the Tax Office is losing more cases in the Federal Court than it has in years – 47 per cent have concluded in the taxpayer’s favour in the tax year to date compared with 35 per cent in 2010 – Ms Granger noted that they were a proportion of a declining number.

In 2010, 75 cases went through the courts. Last year that sank to 45 cases and numbers are on track to fall again this tax year, sitting at 19 to date.

Ms Granger said the figures also showed the advent of the ATO being able to pre-fill tax returns with the vast stores of information it acquires from third parties had taken a lot of “noise" out of the system.

“Returns are more accurate because the information is there – I’d love to see that we could also pre-fill some of the information from inter­national sources as well. The potential is there."

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The overhaul of the law practice was intended to bring the resolution of cases closer to the point of the original decision, rather than at a later litigious stage, Ms Granger said.

“People have more complex, more varied affairs – our tax expertise has had to grow and it is growing exponentially," she said.

The ATO was facing the challenge of increasing demands that it interpret complex issues at an earlier stage, she added, requiring a shift from the past tendency to take time to reflect on and research an issue.

“The only way we will be able to meet that demand is how we lift the skill base of all our officers," said Ms Granger.

The change, hoped to be in place by the end of July, means the ATO’s 380 high-level tax law experts will work in field areas and actively engage in ­matters earlier. They are normally brought in at a late stage. They will also share their expertise and build the skills of the large base of field officers who conduct compliance activities such as audits.

The change aims to address problems identified by the inspector-general of taxation, following taxpayer complaints that audit staff sometimes do not have the requisite expertise.

Ms Granger said tax officers would also try to decide as quickly as possible which cases demanded more resources for fast resolution, in a “triaging" akin to that done by hospitals.

Deloitte’s lead tax controversy partner and former senior ATO staffer Ashley King said the office needed a shift in mindset.

“There are some positive signals coming from the ATO but I think it’s yet to really filter down to the compliance areas," he said.

He said the absence of a separate appeals area handicapped the ATO’s ability to select the right cases to pursue. The ATO used to have such an area – “where the best thinkers in the ATO were" – before it was dismantled in the 1990s, said Mr King, who worked in the area.

Now, cases started in the audit phase and slowly gathered steam before they became “too big an issue to resolve" and proceeded to litigation because “the stakes are too big on either side", he said.

An appeals area would take litigation decisions away from the ­compliance area and allow for an independent internal review.

“That’s what the ATO needs now."

Inspector-general of taxation
Ali Noroozi
has previously called for a separate appeals area, headed by a second commissioner.

Such an area would “empower the ATO’s in-house legal section to independently assess the evidence and prospects of a case before progressing the matter to litigation" and ensure only “genuine and fundamental disputes" were litigated, Mr Noroozi said in his submission to last year’s tax forum.